Investment management consultant MATTHEW FEARGRIEVE shares his personal account of the problems at Coinbase, commiserates with thousands of other unhappy users of the exchange and explains the wider ramifications of the Coinbase service failure for the cryptocurrency industry.
In an increasingly publicized and embarrassing service failure, California-based cryptocurrency exchange Coinbase are evidently still some distance from achieving full resolution of the account freezing that has prevented thousands of their customers from trading Bitcoin over the recent helter-skelter price ride of the world’s leading cryptocurrency.
Whilst Bitcoin broke through record after record in 2020, and has sustained its momentum so far this month (notwithstanding a flash crash last week, following a parabolic price curve throughout Q4 2020), tens of thousands of Coinbase customers have, through no fault of their own, found their accounts frozen; then re-opened; then in some cases closed again, or threatened with closure.
The crypto exchange, based in California, and the biggest for Bitcoin, has feebly blamed “technical” and “connectivity” issues for this systems failure, without volunteering any meaningful additional details. This has, understandably, left thousands of Coinbase users fuming.
Including me.
The Coinbase saga so far
The Coinbase website says that the company has more than 35 million users in over 130 countries worldwide, with more than US$320 billion traded since the exchange’s inception in 2012. It is the leading Bitcoin exchange, and also runs Bitcoin Cash, Ethereum and Litecoin.
The exchange is popular with small investors (like me), who are able to buy Bitcoin with smaller sums of money than the thousands of professional traders who use it every day. We all rely on the exchange being fully accessible and operational at all times, and in accordance with the service levels that we pay for.
I and many other frustrated customers are still being told by Coinbase - after months of problems beginning in October - that our accounts are “under review”, despite having submitted the customary ID and KYC proofs and documents when we opened our accounts.
This, for thousands of Coinbase users, including professional traders of Bitcoin, has been the unhappy backdrop to what should have been an undilutedly euphoric period of several weeks spanning the end of 2020 and the beginning of 2021, when the price of the world’s leading cryptocurrency went from strength to strength.
The number of customer complaints being handled by the company’s service team in San Francisco is said to have peaked this week, as Bitcoin briefly broke through US$40,000. My own complaints and service tickets, submitted since November, number no less than ten.
Coinbase circulated a customer update on the morning of Friday 8 January:
“We’re aware that some customers experienced issues while using Coinbase today. We know that we’re letting many of you down and we’re committed to doing better. We appreciate you bearing with us during this exciting time for the cryptoeconomy“.
An exciting time for crypto. And an undeniably exciting for Coinbase customers, but for all the wrong reasons.
The exchange’s customers first began reporting difficulties accessing their money in October, with even those who had been with the platform for years told they needed to re-upload identity documents like their passport and driving licence, after which they were told their accounts were "under review" and were unable to access their money.
Since the end of October, when customers began reporting their accounts were frozen, the price of Bitcoin has risen from just under US$13,900, a rise of around 133 per cent.
This week thousands of Coinbase users, me included, were again unable to access their deposits, being told that our accounts could not be accessed pending resolution of account-opening checks that we thought had been put to bed.
Many platform users saw the December dip in Bitcoin and wanted to take advantage of it. I certainly had that intention. Trying to buy directly on the Coinbase app, I received a notification that my account was (again) restricted, with the result that I was completely unable to buy and sell. Many of us lost out on lucrative market opportunities, whilst others were unable to hedge and sell when the market moved down, their locked-in deposits losing value in the process.
Many users have withdrawn their deposits and closed their accounts as soon as they were reactivated by Coinbase. I am contemplating doing the same.
The Burden of Regulation
It is the case that regulation of cryptocurrency trading has been increasingly tightened in recent years, with Coinbase users now having to provide more information than they would have previously. Notwithstanding this backdrop, Coinbase has in the past made only oblique references to the increase in regulations as being the cause of enhanced due diligence and KYC checks being inflicted on its users, I suspect in an effort to downplay the looming regulatory overlay that is on the horizon for Coinbase and its competitors.
This increase in documentary requirements from customers has coincided unhappily with the recent massive surge in the price of Bitcoin which, naturally, opened the flood gates to thousands of new customers joining the platform.
The problems at Coinbase are apparently not common to its competitors, notably Malta-based Binance and California-based Kraken. Nonetheless, the service failure at Coinbase has been significant enough to have caused large amounts of Bitcoin and Ethereum to have been blocked out of the whole crypto system, for months.
Coinbase - an apology?
Coinbase, evidently feeling the pressure, have now issued a statement in the following terms:
“Unfortunately, we’re aware that some customers are still having issues accessing their Coinbase accounts. These customers, often for no fault of their own, are being hit by a confluence of factors."
I read on, looking for the detail I feel I deserve, and maybe even an apology:
"As a regulated financial services company, we’re required to maintain rigorous compliance standards in line with other financial institutions in the UK. To ensure compliance with recent regulations, we’ve had to seek additional documentation or information from some customers. While we appreciate that this is a burden for some, it’s our responsibility to meet the standards set by regulators."
OK. So, after months of account problems beginning in October, Coinbase now make explicit reference to the burden that increased regulatory zeal is putting on their operations. This, though, is only telling me what I (and thousands of other Coinbase users) have known for a long time.
"In addition to this, over the past two months we’ve seen a sustained market rally that has brought a significant number of new customers onto our platform and re-engaged many existing, yet passive, customers. These two factors combined have led to an unacceptable lag in our customer support response times.”
Granted, the extent to which Bitcoin has taken off since the beginning of Q3 2020 has taken most of us by complete surprise. But this is an admission by Coinbase of the inadequacy of their systems, is it not?
So, Coinbase - how about an apology, then?
Apparently not. The statement ends there.
This statement will be small comfort to the thousands of Coinbase users who have lost money and/or the opportunity to make money, many of whom will now no doubt, like me, be scanning the terms and conditions they agreed when they joined the platform, with a view to engaging in some legal sabre-rattling about economic loss and the need for compensation.
Consequences for the Crypto Industry
Whilst causing Coinbase a large degree of public embarrassment, this highly-publicized service failure is bad news for the crypto industry as a whole, and not just because of the thousands of Bitcoin trades that were unable to be transacted by Coinbase customers.
For Bitcoin to be taken seriously as a viable, long-term investment, it must shake off niggling concerns about its seemingly-intrinsic price volatility, and the reliability (even legality) of the operational systems that support it.
These concerns are still widespread in the investment management industry, despite the large amount of institutional allocations that Bitcoin has received in the last two quarters.
The Coinbase service failure does nothing to assuage the worries that traditional, mainstream management firms, as well as smaller investors like me, continue to have about the operational soundness of crypto systems. These worries in turn lead to reservations about how safe our deposits, and the extent of our ability to realise returns and mitigate losses using crypto and blockchain technologies, will be.
As a double whammy, Coinbase’s system problems also stem from the increasing regulatory burden that crypto providers must learn to deal with – and fast.
So the unhappy experience of Coinbase users compounds two of the three biggest turn-offs about Bitcoin and cryptocurrencies: one operational, the other regulatory.
The third growth inhibitor for Bitcoin is, of course, its tendency to high, sudden and unexpected volatility.
The price trajectory of Bitcoin over 2021 is entirely another matter (and is addressed in my earlier blog here). Suffice to say that 2021 prices will in part hinge on how much institutional investors, hedge funds and ordinary consumers allocate to the cryptocurrency over the course of the year. The jitters caused by the Coinbase service failure will do nothing to help Bitcoin’s bid to become a serious, long-term investment asset, particularly among its principal target customer base: small investors.
MATTHEW FEARGRIEVE is an investment management consultant. You can read his blog here and see his Twitter feed here.
